Settled for all time?

The Employment Appeal Tribunal recently held, in Bathgate v Technip UK Ltd [2022] EAT 155, that settlement agreements cannot settle potential future claims that – at the time the agreement is entered into – the parties are unaware of.

Settling future claims

Settlement agreements are frequently described as giving the employer and departing employee a “clean break”. The employee receives a financial package, while the employer gains comfort that employment tribunal proceedings will not be inbound.

An impediment to a completely clean break, however, is the matter of potential future claims. Employment law permits certain claims to arise after an employment relationship has ended. An example is a post-employment discrimination claim under the Equality Act 2010 (e.g. in relation to the provision of an unfavourable reference).

Employers, therefore, often seek to ensure that settlement agreements operate to settle any potential future claims that may subsequently arise (as well as settling existing claims).

Position prior to Bathgate

Employment protection legislation sets out various fundamental requirements for a settlement agreement to be valid. 

One requirement is that a settlement agreement must relate to a “particular complaint”. This has long been identified as a potential stumbling block for attempts to settle potential future claims. How can a settlement agreement relate to a “particular complaint” if that particular complaint has not yet arisen – and so is unknown to the parties – when the settlement agreement is entered into?

Despite this, however, it has generally been understood that settlement of potential future claims is possible. A key authority is Hilton UK Hotels Ltd v McNaughton [2005] UKEAT 0059_04_2009, in which the EAT (Lady Smith) identified the following principles:

A “blanket” settlement agreement is not valid (Lunt v Merseyside [1999] IRLR 458 (EAT)). In other words, simply stating “the employee settles all and any claims against the employer” will not work.

A settlement agreement that lists claims being settled by generic description or references to legislative provisions is valid (Hinton v University of East London [2005] EWCA Civ 532).

A settlement agreement can settle potential future claims, provided it does so plainly and unequivocally (Royal National Orthopaedic Hospital Trust v Howard [2002] IRLR 849 (EAT)).

On account of those principles, settlement agreements often contain a clause like this: “This agreement is in full and final settlement of all and any claims the Employee has or may have in future against the Employer whether arising from his employment or its termination, and whether or not such claims and/or the circumstances giving rise to them are, or could be, known to the Parties and including, but not limited to, claims for unfair dismissal under section 111 of the Employment Rights Act 1996, for a statutory redundancy payment under section 163 of the Employment Rights Act 1996, in relation to working time or holiday pay under regulation 30 of the Working Time Regulations 1998, for equal pay or equality of terms under sections 120 and 127 of the Equality Act 2010”, and the list will continue, often to great length. 

Such a clause aims to:

• be a plain and unequivocal settlement
  of both existing and potential future claims (satisfying Howard); and
• list all potential claims by means of a generic description and/or reference to a legislative provision (satisfying Hinton). 

Those principles, however, came under challenge in Bathgate.

Facts of Bathgate

Charles Bathgate had approximately 20 years’ service with Technip. His employment terminated in January 2017, via a settlement agreement which contained:

• a Hinton-type list of claims being settled (including age discrimination under s 120 of the Equality Act 2010); and
• wording to the effect that all potential future claims were being settled.

The financial package included various payments on termination, and an additional payment to be made in June 2017, calculated by reference to a collective agreement.

In March 2017 (i.e. some time after entering into the settlement agreement) Technip decided that the additional payment scheduled for June 2017 need not be paid to Bathgate. He became aware of Technip’s decision in June 2017, and considered it amounted to age discrimination.

To be clear, therefore, at the time the settlement agreement was entered into, neither Bathgate nor Technip could have been aware that Bathgate would subsequently have an age discrimination complaint. At the time of entering into the settlement agreement, that complaint was an entirely unforeseen future claim.

Complaint not settled

Bathgate raised employment tribunal proceedings for age discrimination. The employment tribunal decided that the settlement agreement had validly settled the age discrimination complaint (drawing on the principles identified in Hilton). 

Bathgate appealed to the EAT on this point. The EAT (Lord Summers) held that the settlement agreement did not settle the age discrimination complaint. The requirement for a settlement agreement to relate to a particular complaint meant that potential future claims – that had not yet arisen and were therefore unknown to the parties – could not be settled.

Although Technip referred to Hinton and Howard, the EAT was unmoved. Consulting Hansard, the EAT noted the relevant parliamentary intention was that settlement “should only be available in the context of an agreement which settles a particular complaint that has already arisen between the parties” (emphasis added).

The EAT was also critical of the Hinton-type list approach, observing that it was a construction contrary to the broad purposes of the employment protection legislation: protecting an employee who is agreeing to relinquish rights. It observed that there was no difference in principle between a Hinton-type list and Lunt-type “blanket” wording.

Drafting settlement agreements post-Bathgate

In light of the Bathgate judgment, solicitors drafting settlement agreements may wish to give particular consideration to:

• ensuring that settlement agreements specifically identify the principal complaints “in play” in the particular circumstances (rather than relying solely on a Hinton-type list); 
• considering whether there is merit in having the parties warrant that they are unaware of potential future claims (or circumstances that could give rise to them); and
• managing client expectations about the possibility of future claims arising that the settlement agreement does not – and cannot – cover.  

Settlement agreements can come at emotional times for employees, who should be allowed time and the right advice prior to accepting, Marianne McJannett advises

The changing nature of the economy and job market means that there has been a sharp increase in the number of employer clients looking to exit employees via settlement agreements, and, as a result, more individuals looking for advice in relation to these agreements. While these documents are usually fairly straightforward, they can be an overwhelming and emotional experience for those being offered a settlement agreement. Here we look at when these are used and how an employer should approach this process with any member of staff.

A settlement agreement is a legal document between an employer and employee recording the terms on which the employment relationship comes to an end, and settling any claims which the employee has at the time at which the settlement agreement is entered into. A settlement agreement can be offered to an employee as part of a “protected conversation”, i.e. a conversation which is protected by virtue of s 111A of the Employment Rights Act 1996. These conversations usually arise either prior to or during a more formal process, such as a disciplinary, grievance or performance management process, and allow the parties to agree to end the employment relationship in lieu of proceeding with a formal process. Additionally, a settlement agreement might be offered before or during a redundancy consultation, with the incentive of an enhancement beyond the statutory or contractual redundancy payment, if the agreement is entered into prior to a full redundancy process being undertaken.

Because it is a legal document, the employee requires to take legal advice on the terms of the agreement. Employees require to understand the full implications of entering into a settlement agreement, and what this means in terms of their right to bring any possible claims. As it is in the employer’s interest that an employee signs a settlement agreement, they will make a financial contribution towards the legal expenses.

The most important aspect of the settlement agreement for many employees is the financial contribution that will be made. There are contractual elements to this payment, with a payment in lieu of contractual notice often being made, as well as a payment in lieu of any accrued but untaken annual leave. These elements are subject to deductions for tax and national insurance as contractual payments. In addition, there is often an ex gratia payment, which can be made up of any statutory redundancy, or can simply be a lump sum amount. A termination payment can be paid free from tax and NI up to £30,000, so it is an effective way to agree an exit for employees.

However, where there may be issues around performance or conduct, what might be the biggest incentive for an employee is an agreed reference, and, occasionally, an agreed announcement. This allows employees to understand fully what will and will not be said about them after they have left and to any future employers, which can be worth more than a lump sum payment.

It is recommended that an employee be given 10 calendar days in which to accept the terms of the protected conversation, or initial settlement offer, although depending on the seniority of the person involved or seriousness of the allegations against them, this may be shortened. It is a big decision for an employee to walk away from a job and, although there is often an urgency to the offer being made, employers should understand that there can be a lot of emotion attached to the employee in taking the advice they need, and ensure it is the right decision for them.  

Marianne McJannett is Head of Employment with Bellwether Green